Nov. 5: The MBA TRID comment letter, legal rulings impacting lenders and real estate agents – PHH v. CFPB for dummies

Congratulations to the Arizona Cardinals, who, after the Cubs’ historic victory in the world series, now have the dubious honor of owning the longest championship drought in a major American sports league. The franchise – then the Chicago Cardinals – last won the NFL championship in 1947.


“Life is not measured by the number of breaths we take, but by the number of moments that take our breath away.” No, that is not the theme of next year’s National MBA October conference in Denver. But it might be the theme of certain generations. Speaking of generations, the Cubs had not won the World Series since 1908, when there was still an Ottoman Empire. Something a little timelier is the MBA’s KBYO/TRID comment letter. A few folks have asked me where it is. Here you go. (Like the way I went from a lovely greeting card thought to TRID?)


Legal decisions continue to impact lending. As California goes, so goes the nation? For example, Marc Eisenhart, property attorney at Gates Eisenhart Dawson, sent a note regarding the Sixth District Court of Appeal’s decision in Loubar v. U.S. Bank (“Loubar”). “The Sixth District Court of Appeal’s decision in Loubar v. U.S. Bank (‘Loubar’) rejects the industry’s established use of the term ‘subject to’ (which is merely to provide notice that the property will not be sold ‘free and clear’). Loubar holds that when a property is sold ‘subject to’ specified title exceptions, then as a matter of law, such title exceptions may never be challenged in the future. After Loubar, when a property is sold ‘subject to’ an exception, it would be malpractice for the buyer’s agent/attorneys not to thoroughly investigate any basis for any claim to challenge the validity or enforceability of the title exception, lest such challenge be forever waived.


“Loubar also increases the likelihood of litigation partition actions. Lawyers will now be compelled to join, as indispensable parties, all lessees, leasehold lienors, and potentially all parties holding any easement or servitude interest in the property to avoid the waiver of any future claims against these lesser interest holders by the purchaser of the partitioned property. Not only does Loubar hold that a ‘subject to’ disclosure constitutes waiver of any future claims against the lesser interests, but so, too, does the failure to join those lesser interest holders in the partition action constitute a bar to future claims. This opinion could severely impact the traditional methods by which escrows and real estate transactions are handled in California.”


Keeping on in the legal vein but switching to the lender’s co-pilot, the CFPB, I continue to receive notes about the implications of the recent PHH vs. CFPB appeals court ruling, and whether it makes any difference to the average lender who is focused on helping their borrowers with added focus on compliance. The short answer is “no.” As a reminder, the CFPB claimed that PHH did business exclusively with mortgage insurance companies that agreed to purchase reinsurance from a wholly-owned PHH subsidiary at inflated rates—and that this arrangement violated RESPA’s anti-kickback provision. Director Cordray required PHH to disgorge all the mortgage reinsurance premiums its subsidiary received from mortgage insurers over a twenty-year period ($109 million in all compared to the $6 million penalty imposed by the administrative law judge) on the theory that such premiums constituted kickbacks for referrals by PHH of the initial mortgage insurance business.


Every lender who has been penalized by the Consumer Finance Protection Bureau in the last five years will be watching to see a) if the CFPB appeals the decision, and b) if another court agrees that there should be no fine. (The recent ruling did away with the fine altogether, overturning the $109 million fine on PHH by the CFPB.) I am simplifying things quite a bit, but my guess is that if the case is appealed and another court agrees that the fine was wrong, every lender who has been fined will be suing the CFPB. Lawyer up!


Secondly, the average lender will have varying degrees of interest in the ruling that the structure of the CFPB is unconstitutional. The structure doesn’t impact enforcement actions, or the monitoring of lenders. The Bureau’s structure violates the Constitution’s separation-of-powers principles because there is no multi-member bipartisan Commission and the single Director may be removed by the President only “for cause.” The court’s remedy was to invalidate the statutory provision permitting the President to remove the Director only for cause during the Director’s five-year term; if the decision stands, it will have the effect of permitting a President to remove the Director at will.


Third, fans of MSAs and joint ventures gazed longingly at the court unanimously rejecting the CFPB’s interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), which had ruled certain payments unlawful under RESPA’s anti-kickback provision that HUD’s prior guidance expressly permitted. The court went on to hold, also unanimously, that the retroactive application of the Bureau’s new interpretation of Section 8 violated due process. In addition to finding the CFPB’s RESPA interpretation impermissible under the statute, the court held that the CFPB’s retroactive imposition of a new RESPA interpretation reversing the prior HUD guidance violated PHH’s due process rights.


Put another simple way, the CFPB can’t just dismiss HUD’s prior rules, and cannot create rules now and apply them to the past business practices of lenders. Just like everyone else, the CFPB is subject to a three-year statute of limitations under RESPA in its both judicial and administrative enforcement proceedings.  The court restated the general presumption that federal causes of action must be subject to statutes of limitations. It rejected the CFPB’s contention that it is subject to a three-year statute of limitations in judicial proceedings under RESPA but is not subject to any limitations period whatsoever in administrative proceedings. The court held that Congress did not authorize the CFPB to bring administrative actions for an indefinite period (which would allow the agency to impose sanctions years or even decades after the challenged conduct), and that—with respect to all 19 consumer protection statutes the CFPB has authority to enforce—the CFPB is subject to the statutes of limitations contained in those statutes.


The court rejected the CFPB’s interpretation of Section 8 of RESPA as incorrect and inconsistent with the statute. The CFPB took the position that Section 8(c)(2), which provides that nothing in Section 8 prohibits reasonable payments in return for goods, facilities or services actually provided, does not provide a substantive exception to RESPA’s anti-kickback provisions. The court, however, did not agree with the CFPB, the opinion noted that one of RESPA’s goals was to allow providers to refer customers to each other without payments for such referrals and that Section 8(c) “contains a series of qualifications, exceptions, and safe harbors” allowing “bona fide” payments by a mortgage insurer to a lender for services the lender actually provides.


The court defined “bona fide” payments as payments of reasonable market value and directed the industry to look to long-standing advice from HUD on the matter.  The court expressly stated that there is no basis for treating fair market value payments as prohibited payments for referrals if services were actually provided and that HUD’s view should prevail; therefore, only the amount of any excess over fair market value may be presumed to be a disguised referral fee.  The court concluded that “the CFPB’s interpretation flouts not only the text of the statute but also decades of carefully and repeatedly considered official government interpretations.”  The court reminded the CFPB that the decision as to whether to adopt a new prohibition under RESPA is for Congress and the President when exercising their legislative authority, and is not a unilateral decision for the CFPB.


The court’s analysis appears to provide a basis for upholding marketing services and advertising arrangements that settlement service providers had put on hold pending the outcome of the PHH case. If, as the court held, and contrary to the CFPB’s stated position in recent enforcement proceedings, Section 8(c) of RESPA provides an exception to the anti-kickback provisions for reasonable payments in return for actual goods, facilities, or services provided—even where referrals also may be present (as long the referrals are not compensated) – then settlement service providers should be able to enter into services agreements as long as payments under such arrangements do not exceed the fair market value of actual goods, facilities, and service provided.


That all being said, the ruling came through on October 11th and the clock is ticking for an appeal by either party. The finality of the panel’s decision will be uncertain for some time. The CFPB could request an “en banc” rehearing, which means all the judges on the D.C. Circuit would consider the case. The government has 45 days (and PHH has 30 days) under the court’s rules to petition for rehearing en banc. Either party could also petition the U.S. Supreme Court to review the case. If the government chooses to do this, it has 90 days, and extensions are rarely granted. If the government seeks review, the parties will have 90 days to petition the Supreme Court after any decision regarding the en banc petition. In both cases review is discretionary—neither of these courts is required to review the panel’s decision.


It is not clear, which, if any, of the issues will be appealed by the CFPB. Although the CFPB has independent litigating authority, the Justice Department will be heavily involved in the decision-making at this point and the Solicitor General will make the determination whether the agency may petition the Supreme Court and on what issues. During his reading, uh, speech at the MBA’s recent conference, Mr. Cordray, who people close to him say is unfazed by the ruling, said that the CFPB had not decided on a course of action.


Law firm Mayer Brown did a thorough write-up of the case and its findings.



This week included a series of physics laws governing cartoons – something a little different. There is a series of amendments – a little long but there are some definite fans out there so here you go!

Cartoon Law Amendment A

A sharp object will always propel a character upward. When poked (usually in the buttocks) with a sharp object (usually a pin), a character will defy gravity by shooting straight up, with great velocity.

Cartoon Law Amendment B

The laws of object permanence are nullified for “cool” characters. Characters who are intended to be “cool” can make previously nonexistent objects appear from behind their backs at will. For instance, the Road Runner can materialize signs to express himself without speaking.

Cartoon Law Amendment C

Explosive weapons cannot cause fatal injuries. They merely turn characters temporarily black and smoky.

Cartoon Law Amendment D

Gravity is transmitted by slow-moving waves of large wavelengths. Their operation can be witnessed by observing the behavior of a canine suspended over a large vertical drop. Its feet will begin to fall first, causing its legs to stretch. As the wave reaches its torso, that part will begin to fall, causing the neck to stretch. As the head begins to fall, tension is released and the canine will resume its regular proportions until such time as it strikes the ground.

Cartoon Law Amendment E

Dynamite is spontaneously generated in “C-spaces” (spaces in which cartoon laws hold). The process is analogous to steady-state theories of the universe which postulated that the tensions involved in maintaining a space would cause the creation of hydrogen from nothing. Dynamite quanta are quite large (stick sized) and unstable (lit). Such quanta are attracted to psychic forces generated by feelings of distress in “cool” characters (see Amendment B, which may be a special case of this law), who are able to use said quanta to their advantage. One may imagine C-spaces where all matter and energy result from primal masses of dynamite exploding. A big bang indeed.



If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “How Consumers Influence Interest Rates.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


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Rob Chrisman